Finance is a black box! Financial Times questions Pinduoduo, netizens respond.

On March 6th, an article from the Financial Times titled "The mysterious rise of the Chinese ecommerce giant behind Temu" seriously questioned PDD.

On the same day, PDD dropped by 3.87%, while Alibaba rose by 2.28%, and JD's performance exceeded expectations, surging by 16.18%.

By combining the insights from the article and feedback from some netizens, we can gain a more comprehensive understanding of PDD's business.

The article raised a series of questions:

1. Why does PDD seem more like a small company when comparing employee numbers and R&D expenses?

2. Why do competitors almost never mention the impact of PDD on them, as if it doesn't exist?

3. Why do the balance sheet indicators not match the revenue?

4. Why does a company with a market value of hundreds of billions of dollars only have physical assets of less than 150 million dollars?

5. All these doubts add up to a bigger question: Why are US stock investors so confident in this opaque company with inconsistent finances?

Compared to other e-commerce platforms of similar scale, PDD's employee numbers challenge all assumptions about e-commerce logistics: it had 12,992 employees last year, one order of magnitude less than Alibaba, while Amazon has 1.5 million employees... Alibaba invests $5 billion annually in property and equipment, including maintaining 1,100 warehouses, while PDD only has $146 million in physical assets—mainly office equipment, IT hardware, and software...

Employees use aliases and have little knowledge of each other. The management structure is flat, with a small group of decision-makers commanding a large number of "grassroots" workers for long hours...

PDD claims to have $2.5 billion in cash, even after investing heavily in Temu's expansion. It sold goods worth $2 billion in 2020 and 2021, yet its financial statements do not disclose any inventory or cost of goods sold, which are two standard retail accounting items.

Things got even stranger after the founder left in 2021: After losing 27 billion RMB (about $4.2 billion) over three years, PDD suddenly turned a profit of 2.4 billion RMB (about $380 million) in the second quarter of 2021.

The company then announced its first hundred billion RMB subsidy plan, intending to spend the funds on "agricultural projects" without a clear business purpose... It is currently unclear how this money was spent and whether it should have been spent. There is also no detailed explanation in the financial statements audited by Ernst & Young.

Financial statements are inconsistent: In a recent quarter of explosive performance, the growth rate of marketing services is roughly the same as since mid-2021, with a year-on-year growth of about 40%. However, the growth rate of transaction fee income during the same period is more than three times that of marketing services. According to the trading fee rate reported in its 2021 annual report, the incredible growth has expanded the scale of the PDD ecosystem to twice the size of Alibaba, equivalent to the annual output value of Italy's economy of $2.2 trillion.

In the battle of online marketplaces, Taobao reported last month that its acceptance rate has improved, the number of merchants continues to grow, and there is no sign of being squeezed by PDD. Alibaba's executives have not mentioned the name of this competitor in any earnings conference call. eBay stated last year that they have not seen any impact from Temu on their business. Amazon also did not mention this in their performance report this month...

Lastly, PDD does not have a CFO. Since its IPO in 2018, the company has appointed its fourth "Vice President of Finance".

Some netizen responses:

Netizen 1:

PDD's model focuses on aggregating demand, integrating the supply chain, C2D/D2C, declaring the end of the traditional model of street stalls and large supermarkets like Taobao and Tmall.

Especially in today's social networks, PDD has been making waves in the U.S. market, even causing Amazon to panic, step up defenses, and retreat step by step. The most typical example is Amazon's domineering policy in its warehouses, quietly delisting products, with the real battle yet to come.

Although there are many defective products on the TEMU website, in the C2D/D2C platform, these can be easily cleared. It's just a matter of time before the bullets start flying... PDD may become a dark horse among the "new Chinese concept stocks".

Netizen 2:

The CEO is very low-key, and the company's actions are more in line with the policy of helping rural areas and farmers, so PDD has not been affected by the rectification of the platform economy. Also, not listing in Hong Kong, I am quite surprised.

In terms of operations, what I know about their e-commerce business is that they mainly order directly from factories, reducing the profit margin of middlemen, and indeed pressing prices lower. Amazon is now following suit.

But in terms of employees, they seem to be not very generous. Recently, there have been negative news about them, such as no subsidies after leaving. They were very low-profile at the beginning, but in recent years, I have seen good reviews from people around me who have ordered from them, such as buying groceries.

However, counterfeiting is inevitable, it's just a matter of how much. Many reports are released just to manipulate stock prices, but he has an additional geopolitical risk compared to other stocks... So, caution is still advised in trading.

But he is indeed a pillar of Chinese concept stocks. Among Chinese concept stocks, only PDD and Li Auto have taken an independent path in the face of international tensions.

Netizen 3:

As an ordinary consumer, I feel that the rise of PDD is somewhat like Xiaomi's slogan "For the masses, by the masses".

Netizen 4:

I am a seller on Pinduoduo. The main source of Pinduoduo's profits actually comes from various strict fines imposed on sellers, as well as promotional expenses. One of the fines includes penalties for poor customer service, slow logistics during shipment, or even mentioning an item is out of stock during a chat. There are about a dozen types of fines like these. As for promotional expenses, if you do business on Pinduoduo, you almost have zero traffic without spending money. There are also various unjustified freezes of buyer funds.